Inflation set to top RBI target in July and August on high vegetable prices: Nomura

Consumer price inflation is expected to exceed the Reserve Bank’s 6% tolerance threshold again in July and August due to soaring vegetable prices, a Japanese brokerage said on Friday. The government, which banned non-basmati rice exports earlier this week, is likely to introduce more supply-side measures to rein in rising prices in the future, Nomura said in a note.

“We expect supply-side interventions to continue, with inflation likely to be above 6% in July and August, supported by soaring vegetable prices,” Nomura economists said.

Last year, inflation had been above the 6% mark – the upper tolerance level under the flexible inflation targeting put in place – for more than three quarters in a row. This led RBI to write an explanatory note to the government explaining the reasons why the price increase was above the set threshold.

The Reserve Bank of India (RBI) started its efforts to control inflation with rate hikes and raised the repo rate by 2.50% compounded in policy actions from May 2022 to stop rising prices.

Earlier this year, the central bank paused its rate hike cycle to pay attention to growth, and many analysts expect an extended pause in policy rates before starting to cut interest rates.

Consumer price inflation (CPI) rose to 4.81% in June from 4.31% in May, driven by soaring food prices. Nomura said rice inflation rose to 12% in June from 9% earlier, and daily data also suggests further price increases in July. The government imposed a 20% export tax on non-basmati rice in September last year, and with the latest ruling, 42% of rice exports are now banned, Nomura said.

According to the note, the late onset of the monsoon and its uneven distribution is disrupting paddy plantings which as of mid-July are currently 6% lower.

“It (the export ban) also marks the latest in a series of supply-side interventions, highlighting inflation as a policy priority, with national elections in Q4 2023 and general elections in Q2 2024,” the brokerage said.

Furthermore, he said India accounts for 40% of global rice exports and the ban will impact global prices.

Thailand may gain from India’s decision, as the Southeast Asian country is a net exporter of rice. Among rice-importing countries, the Philippines, Singapore, Hong Kong and Malaysia could be affected by the move, he added.